U.K. Crisis Spills Into U.S. Junk Debt

[resjudicata]

@aihi Exactly. ZIRP comes to bite.

 

[skyflowers]

@aihi Investment grade corporate debt is yielding 5.44% at the moment. Seems usable

 

[mynameisapp]

@skyflowers … yeah, partially because of massive sell offs triggered exactly by the event being discussed here.

 

[joeboe]

@resjudicata The /@shivani00102 has been classed as a Class 3 Terrorist State. #Save3rdPartyApps

 

[lifeaintagame]

@resjudicata Do you know this or are you guessing?

I don't know the internal workings of these funds but I'd be very surprised if what you said is correct.

 

[alpha42]

@lifeaintagame It is basically right. Generous defined benefit plans hashed out in the 60's to 80's are coming due and some fuckery in accounting standards subsequently led to underfunding pensions for decades. They realized this in the 90s and the political will to tax more or cut other programs to divert funds wasn't there so they broke investment philosophy and started to invest in riskier instruments. The state of Oregon was a 'pioneer' in this and went around bragging about their returns and now pretty much all pension funds do this.

How's this for pressure? Oregon has pensions with a guaranteed 8% annual return! Can you imagine trying to create that kind of performance for decades using low risk investments?!

Of course my comment is US specific and I know nothing about how it has all played out in the UK.

 

[lifeaintagame]

@alpha42

It is basically right.

Of course my comment is US specific and I know nothing about how it has all played out in the UK.

This is a key point. I've not worked for pension funds but I have worked for investment firms that sell products to UK pension funds. Everything I was taught about how the funds operate tells me they simply aren't allowed to increase their risk levels.

 

[alpha42]

@lifeaintagame Fair enough. I am well versed on US pensions but have very little expertise on UK pensions. From what I do know is short term obligations are treated and regulated differently and they can use leverage and other instruments that you would not expect from a pension fund. Specifically the swaps that were at the center of this crisis.

 

[resjudicata]

@lifeaintagame I’ve heard this from Peter Schiff and Jeff Snider on macro voices I think. Like I said correct me if I’m wrong but this is my understanding. If you look into it comment back. I’m not UK based and don’t have any pension prospectus or anything to look it

 

[lifeaintagame]

@resjudicata Your answer suggests the funds simply wanted to take more risk so they leveraged their assets. I don't believe that's the case. It's probably also illegal. Pension funds are highly regulated.

The funds have predetermined future liabilities that they need to meet. They use a range of financial products to guarantee they can meet those liabilities. Some of which require the posting of capital. Even simple interest rate swaps require capital since 2008. That's just one simple product they use, in reality they will use a lot more.

The capital posted was gilts. As these crashed the funds received margin calls.

 

[resjudicata]

@lifeaintagame So what can pension funds invest their capital in? Securities only?

 

[resjudicata]

Just one point to note - these are defined benefit (I.e. guaranteed) pensions, so there is no tell people to contribute more option or decrease benefits. It’s find more money or enter into insolvency, hence the growth in LDIs and leverage.

Edit - To clarify, I’m talking about the UK pension schemes that are hitting the wall this week.

 

[resjudicata]

Oh jeeze. So any change to that side of the equation has to happen legislatively? What a nightmare

 

[resjudicata]

Watch this space, it’s about to get worse. The Bank of England is pulling support from Friday.

 

[resjudicata]

I wonder what the broader effects will be. Seems like the dollar is sucking up some currencies.

 

[rg21]

@resjudicata Central banks really fuck every think up. They need to stop their madness.

 

[greenteapot3255]

@resjudicata By "obligations" you mean regular payments to the pensioners ? I'm just trying to understand this whole thing.

 

[resjudicata]

@greenteapot3255 Yeah

 

[godsendwoman06]

@resjudicata

So in order to meet that they borrow another $100 using the original bond as collateral, and just double up and buy another bond with the borrowed cash, bringing a 6%

Wait what? Where is the interest repayment on the borrowed $100?

 

[resjudicata]

@godsendwoman06 This was a simplified example